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NCPERS: Public pension funds going more conservative in assumptions, keeping costs down

Public pension plans continued to be more conservative in their assumptions while keeping expenses down during 2017 despite producing strong returns, said results of a survey released Wednesday by the National Conference on Public Employee Retirement Systems.

Most respondents (85%) of the 2017 NCPERS Public Retirement Study said they have either reduced their investment return assumptions (64%) or plan to do so (21%). The average investment assumption still stood unchanged at 7.5% and the average inflation assumption ticked down to 2.9% from 3%.

With more plans lowering assumptions, employer contribution rates have risen to 22% in 2017 from 18% in 2016. In addition, plan sponsors are becoming more diligent in making required contributions, with the percentage of funds receiving full actuarially required contributions rising to 74% from 70%.

Public funds continue to remain cost effective. While all responding plans report the total cost of administering their funds and paying investment managers was 55 basis points in 2017, up 1 basis point over the total cost of 54 in 2016, the 86 plans that participated in both 2016 and 2017 saw their costs drop to 52 basis points.

Aggregated annual investment returns jumped to 7.8% in 2017 from 1.5% in 2016. Returns depended on an individual plan's fiscal-year end. Longer-range returns either stayed at or near the average assumed rate of return for the universe.

Funding levels dipped to an aggregate 71.3%. Pension plans that replied in both 2016 and 2017 have an average funding level of 72.9%, down from 74.7%.

Also, the smoothing period for calculating investment returns continues to be shortened, dropping to five years from 5.7 years.

The 2017 study surveyed 164 state and local government pension funds representing $1.8 trillion in assets in September to December. Of those, 62% were local funds while 38% were state plans.